Archive for June, 2024

« Older Entries

Establishing a benchmark yield curve in Philippines

June 28, 2024

Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas in this speech talks about building a yield curve using Interest rate swaps:

Today our focus is on the topic, “Building a Benchmark Yield Curve using Interest Rate Swaps.”
I have my own strong views on this topic, but because we have such an excellent line-up of presenters and discussions, I expect those views to change. 
Allow me to share those views. 
As many of you know, a benchmark yield curve is something we need to strengthen the transmission mechanism of our monetary policy. 
It is also part and parcel of the goal of developing the country’s capital markets.  A benchmark yield curve is one that serves to reconcile the diverse views of market participants. This makes it very useful for pricing other instruments including mortgages and corporate term loans. 
At present, we rely on something called BVAL (Bloomberg Valuation Service) for our yield curve.  I have described this curve as a very choppy curve. That choppiness is an indication of a fragmented bond market with liquidity shifting from one maturity to another. 
Perhaps, one way to fix this is to revive our interest rate swap market. I say revive because I was told we used to have such market and I do not understand why it died. 
In the Eurozone, when that economy switched to a common currency in 2000, their bond market was also a fragmented one. The most active ones were the German bond market, the Italian bond market, and the French bond market, in that order in terms of turnover. 
Then, an amazing thing happened out of nowhere. The euro interest rate swap market emerged. 
By 2001, within one year, the turnover in the swap market had surpassed the turnover in those other three bond markets and it soon became the benchmark yield curve for all of the Eurozone. 
Eventually, we hope to see a similar benchmark yield curve in the Philippines. One that can potentially be smoother than the BVAL curve. 
We hope that we can get ideas from this discussion on how some curve-it does not have to be the swaps curve-could gain wide acceptance as a benchmark among market participants. 
Really interesting to note how these ideas are picked up an implemented.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance, Speech / Interviews | Leave a Comment »

Voting on Public Goods: Citizen democracy vs. Shareholders democracy

June 28, 2024

Democracies have become of two types: citizen driven and shareholder driven. There are frictions in the two democracies in terms of what they wish from the government.

Robin J. Döttling, Doron Y. Levit, Nadya Malenko & Magdalena A. Rola-Janicka in this NBER paper sum up much of the frictions in Indian and global political economy. 

We study the interplay between a “one person-one vote” political system and a “one share-one vote” corporate governance regime. The political system sets Pigouvian subsidies, while corporate governance determines firm-specific public good investments. Our analysis highlights a two-way feedback effect.

In a frictionless economy, shareholder democracy is irrelevant: the political system fully offsets any effects of shareholder influence.

With frictions in public policy provision, pro-social corporations fill the void of a dysfunctional regulatory system and increase the provision of public goods-demonstrating the benefit of shareholder democracy.

Nevertheless, shareholder democracy can hurt a typical citizen because of the representation problem: it favors the preferences of the wealthy. If shareholders have extreme views, there can be a backlash against ESG initiatives, and the political system may undo or tax corporate social responsibility measures.

Advancements in financial technologies that increase investor diversification or enable pass-through voting have important implications for these trade-offs of shareholder democracy.

The paper could have given some case studies along with all the math!

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance, Growth and development | Leave a Comment »

Neglected contributions of R.G.Hawtrey to macroeconomics

June 27, 2024

Prof Dilip Nachane in this IGIDR paper writes about the neglected bontributions of R.G.Hawtrey to macroeconomics:

In the inter war years (1919-39) macroeconomics was at the forefront of attention of both thinkers as well as policymakers. This paper focuses on Hawtrey, one of the major economists of that period whose contemporary influence on macroeconomic theory as well as policy was significant, but whose contributions, in the aftermath of World War II, have gone largely into oblivion.

We begin with a brief exposition of the main strands of Hawtreyan macroeconomics.  We then try to demonstrate the significant influence that Hawtrey’s ideas had on Keynes’ views, highlighting both the areas in which their ideas differed and where their views reinforced each other’s.

Before concluding, we draw attention to at least five contributions of Hawtrey, which have a strong claim to be considered original but which have received scant professional credit viz. the multiplier, the accelerator, quantitative easing, crowding out and the announcement effect of monetary policy.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Economist, Financial Markets/ Finance | Leave a Comment »

Using nudges to improve food choices: An experiment in Uruguay

June 27, 2024

Ana Balsa, Cecilia Noboa and Patricia Triunfo run a nudge experiment in Uruguay to improve food choices:

In a recently published study (Balsa et al. 2023), we evaluate the impact of an intervention that involved sending WhatsApp messages to regular customers of a supermarket chain in Uruguay with the aim of nudging healthier food purchases.

We randomly assigned a subset of 1,590 regular customers to receive three short, simple messages per week for eight weeks (from July to September 2020). These messages focused on various topics: cooking at home, eating vegetables, fruits, healthy snacks, legumes and fish, and conscious and healthy eating. Their design aimed at addressing biases that are likely to lead to suboptimal food choices (see Figure 1).

For example, sending recurrent information via WhatsApp about the benefits of healthy foods helps address present bias. Proposing simple actions mitigates inaction due to inattention and decision fatigue, and highlighting public figures’ good habits makes the messages more salient and signals a social norm.

We found that, on average, customers responded favourably to the messages: they increased their purchases of fruits and vegetables by 8% and substituted sugar‐sweetened beverages for sugar‐free ones.

However, as with other behavioural economics experiments, reactions to nudges were qualitatively heterogeneous. Customers more likely to be uninformed or to suffer from cognitive inattention or present bias (those with lower education, lower income, or younger children) were more likely to respond directly to the nudges, increasing their purchases of foods and vegetables.

On the other hand, better-educated customers with higher incomes or no young children tended to substitute higher-calorie ultra-processed foods with lower-calorie ones. These customers even ended up increasing their total spending on this food, without affecting or even decreasing, in certain cases, the total number of calories or fats purchased.

These results indicate that interventions may need to discourage the consumption of ultra-processed foods in addition to promoting the purchase of healthy foods. The effects do not persist in the long term, suggesting that attention management, rather than information, is the primary channel driving the changes in behaviour.

Posted in Academic research & research papers, Behavior Eco/Fin, Economics - macro, micro etc | Leave a Comment »

Digital Euro: Guaranteeing privacy in both online and offline usage

June 27, 2024

ECB has released second phase report of Digital Euro:

The Eurosystem’s digital euro project aims to ensure central bank money evolves alongside current payment preferences and trends, as well as to facilitate electronic payments everywhere in the euro area and strengthen Europe’s strategic autonomy. A digital euro would be a digital means of retail payment issued by the Eurosystem – which consists of the European Central Bank (ECB) and the national central banks of the euro area – available to everyone in all retail payment scenarios, across the entire euro area. It would complement cash, offering individual users more freedom of choice by providing a secure and accessible payment solution. A digital euro would also strengthen Europe’s monetary sovereignty and reduce our dependence on the large, non-European private payment providers that currently dominate the European landscape.

Given digital thumbprints, privacy is central to the project:

(more…)

Posted in Academic research & research papers, Central Banks / Monetary Policy | Leave a Comment »

Indian banks recording soaring profits but bank employees in despair?

June 26, 2024

Tamal Bandyopadhyay, one of the foremost banking sector experts wrote recently how Indian banks are making record profits:

In the financial year 2024, which ended in March, 26 listed banks – 14 private banks, seven public sector banks (PSBs) and five small finance banks – had less than 1 per cent net non-performing assets (NPAs). When did we last see such robustness in the Indian banking industry?

In another article by Hemant Gairola, employees in banking sector are having a very tough time:

Work woes pushed nearly 500 bank employees in India to suicide over the past decade. Some left damning letters citing abuse by seniors, and unions said staff were being coerced to commit fraud in order to present a rosy picture of achieved targets. Customers are not unaffected—fraudulent practices rob account-holders, litigation costs affect shareholders’ dividends. Over 100 letters by staffers, unions to management detailed systemic abuse and disempowerment of employees, and normalisation of fraud. 

How do we make sense of these two very different pictures of Indian banking?

 

Posted in Academic research & research papers, Indian Economy/Financial Markets | Leave a Comment »

Artificial intelligence and the economy: implications for central banks

June 26, 2024

Hyun Song Shin of BIS discusses the benefits and challenges for central banks of the latest artificial intelligence technology.

  • Machine learning models excel at harnessing massive computing power to impose structure on unstructured data, giving rise to artificial intelligence (AI) applications that have seen rapid and widespread adoption in many fields.
  • The rise of AI has implications for the financial system and its stability, as well as for macroeconomic outcomes via changes in aggregate supply (through productivity) and demand (through investment, consumption and wages).
  • Central banks are directly affected by AI’s impact, both in their role as stewards of monetary and financial stability and as users of AI tools. To address emerging challenges, they need to anticipate AI’s effects across the economy and harness AI in their own operations.
  • Data availability and data governance are key enabling factors for central banks’ use of AI, and both rely on cooperation along several fronts. Central banks need to come together and foster a “community of practice” to share knowledge, data, best practices and AI tools.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

The Life and Times of the Indian Economy

June 26, 2024

On his Seen and Unseen podcast, Amit Varma records a 10 hour episode with Prof Rajeswari Sengupta on Indian economy.

There is just so much to hear, absorb, take multiple breaks and yet it does not end.   The shownotes at the end is quite a reading list too.

The episode could easily be included as a required hearing in courses on Indian economy. If transcripted, it could be a very interesting book.

 

Posted in Indian Economy/Financial Markets | Leave a Comment »

How banks with similar sounding names create confusion for depositors in times of crisis

June 25, 2024

Ryuichiro Izumi, Antonis Kotidis, and Paul E. Soto in this Fed paper point how US banks have similar names. This creates confusion for depositors:

One in five banks in the United States share a similar name. This can increase the likelihood of confusion among customers in the event of an idiosyncratic shock to a similarly named bank. We find that banks that share their name with a failed bank experience a half percent drop in transaction deposits relative to banks with similar characteristics but different name. This effect doubles for failures that are covered in media. We rationalize our findings via a model of financial contagion without fundamental linkages. Our model explains that when distinguishing banks is more costly due to similar trademarks, depositors are more likely to confuse their banks’ condition resulting in financial contagion.

The problem is not limited to US alone:

These episodes are by no means a U.S. or recent phenomenon. On September 4, 2014, in India, following the news coverage by a Bengali newspaper that the Jalpaiguri Cooperative Bank Limited did not have the required RBI licence to be an active bank, depositors became confused with the name and turned up at the Jalpaiguri Central Cooperative Bank branches wanting to withdraw their money.

In October 1934, depositors ran on the Amoy branch of the National Industrial Bank of China. The reason was a rumour that the bank’s head office in Shanghai was closed and the bank had gone out of business. The truth, however, was that a similarly sounding bank in Shanghai had closed on the exact same day.

In September 1985, as concerns mounted over the health of small Canadian banks, a run developed at the Continental Bank of Canada. According to its president, “the bank was also hurt by statements in the media confusing it and a troubled trust company with a similar name”, eventually resulting in a support package from a group of financial institutions and the Bank of Canada.

Superb and a very important paper.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

A Teacher Writes to Students Series (23): A Taste of Pluralism

June 25, 2024

A Teacher Writes to Students Series (23): A Taste of Pluralism
By Annavajhula J C Bose, PhD
Department of Economics, SRCC, DU

(more…)

Posted in Discussion | Leave a Comment »

A memo to government: Please read Prof Amit Bhaduri’s ‘Development with Dignity’

June 25, 2024

In an earlier article, I had argued how Elections-2024 were very similar to Elections-2004. Just that BJP managed to hold onto power with the help of coalition partners.

Prof Amit Bhaduri wrote a monograph titled ‘Development with Dignity’  in 2005. It was written after the 2004 election as a reminder to the government for not getitng carried away with growth in GDP and stock markets.  Instead it should focus on development with dignity which looks at providing jobs for all.

In this article in Deccan Herald, I argue why Prof Bhaduri’s monograph is a must read 20 years later.

Posted in Academic research & research papers, Growth and development, Indian Economy/Financial Markets | Leave a Comment »

Swiss Central Bank makes history with first tokenized Monetary Policy

June 25, 2024

SNB in its June-2024 monetary policy announced the following:

I would now like to give you some news about the SNB’s Project Helvetia III. As you know, since 1 December 2023, the SNB has been providing wholesale central bank digital currency (wholesale CBDC) as part of this innovative project. It issues this wholesale CBDC on the regulated SIX Digital Exchange (SDX), which uses distributed ledger technology. Digital (token-based) Swiss franc bond transactions can thus be settled in central bank money directly on SDX. With Project Helvetia III, the SNB is playing a globally leading role in deploying wholesale CBDC in a live production environment.

Six banks are participating in the current Project Helvetia III pilot: Banque Cantonale Vaudoise, Basler Kantonalbank, Commerzbank, Hypothekarbank Lenzburg, UBS and Zürcher Kantonalbank. These banks have to date settled six digital bond issuances. The cantons of Basel-Stadt and Zurich, the cities of Lugano and St Gallen, as well as UBS and the World Bank have each issued a bond on SDX as part of the pilot project. The total value of transactions settled is around CHF 750 million.

At the beginning of June, the SNB became the world’s first central bank to carry out a monetary policy operation in a live production environment using distributed ledger technology. Specifically, we successfully issued digital SNB Bills on SDX. These tokenbased SNB Bills (issued volume: CHF 64 million) had a term of one week.

There is more here.

Posted in Central Banks / Monetary Policy | Leave a Comment »

Impact of digital banking on the value of the deposit franchise and the stability of the banking sector

June 24, 2024
Naz Koont, Tano Santos & Luigi Zingales

We study the impact of digital banking on the value of the deposit franchise and the stability of the banking sector. Using the classification of digital banking in Koont (2023), we find that when the Fed funds rate increases, deposits flow out faster, and the cost of deposits increases more in banks that offer a mobile app and brokerage services.

Using the model of Drechsler et al. (2023b), we find that correcting for digital betas and deposit outflows results in a deposit franchise value that is 14-22% lower for digital-broker banks relative to traditional banks. Moreover, we find that digital-broker banks’ deposit franchise values increase by less when interest rates rise, serving as less of a hedge.

We apply this analysis to the case of Silicon Valley Bank (SVB) and find that the reduced value of the deposit franchise can explain why SVB was insolvent in early March 2023, even before the bank run occurred.

Very interesting. Should be replicated for Indian banks which also offer mobile apps and brokerage services.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

Third Places and Neighborhood Entrepreneurship: Evidence from Starbucks Cafés

June 24, 2024
Jinkyong Choi, Jorge Guzman & Mario Small in this NBER paper study the impact of Starbucks cafes on local entrepreneurship:

Sociologists have shown that “third places” such as neighborhood cafés help people maintain and use their network ties. Do they help local entrepreneurs, for whom networks are important? We examine whether the introduction of Starbucks cafés into U.S. neighborhoods with no coffee shops increased entrepreneurship.

We find that, when compared to census tracts that were scheduled to receive a Starbucks but did not do so, tracts that received a Starbucks saw an increase in the number of startups of 5.0% to 11.8% (or 1.1 to 3.5 firms) per year, over the subsequent 7 years. There was no effect on neighborhoods with prior cafés.

A partnership between Starbucks and Magic Johnson focused on underprivileged neighborhoods produced larger effects. Starbucks locations with more square footage and those with a higher number of visits also produced larger effects.

Posted in Academic research & research papers, Economics - macro, micro etc, Growth and development | Leave a Comment »

Inflation Targets: Practice Ahead of Theory

June 24, 2024

Mervyn King in this NBER paper discusses how Inflation targeting is a case of practice ahead of theory:

Inflation targets were introduced well ahead of the development of the theory of inflation targeting. The practice was successful because it comprised a new set of procedures and institutions for setting monetary policy in a transparent and accountable fashion – “constrained discretion”; the later theory was less useful because it purported to be a theory of the determination of the price level. But inflation targeting does not constitute a new theory of the monetary transmission mechanism.

The belief that it does led to the replacement of Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” by the new dictum that “inflation is always and everywhere a transitory phenomenon”. This had unfortunate consequences during the recent inflation. The paper concludes with a discussion of the challenges facing inflation targets in the future.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

In their shoes: mechanics of empathy

June 21, 2024

Marianne Andries, Leonardo Bursztyn, Thomas Chaney & Milena Djourelova in this NBER paper explore mechanics of empathy via an economics experiment:

We explore the mechanics of empathy. In a controlled immersive virtual reality experiment, we show that neutral information on unauthorized immigration magnifies the empathetic response of subjects when they witness the struggles of unauthorized migrants.

We conjecture that perceiving others as similar magnifies empathy: it makes it possible to live their experience as if one were ‘in their shoes.’ In a separate, incentivized experiment, we show that the same neutral information increases perceived similarity to unauthorized migrants.

We provide similar evidence in observational data, showing that contact with a given foreign origin group induces a greater empathetic response – more charitable donations – after the country of origin of this group is hit by a natural disaster, and a higher perceived similarity to this group. Together, our evidence suggests that the ability to put oneself in the shoes of another person or group can be enhanced through standard policy tools such as neutral information provision and inter-group contact.

Posted in Academic research & research papers, Economics - macro, micro etc | Leave a Comment »

Continuity and Change in the Federal Reserve’s Perspective on Price Stability

June 21, 2024

David López-Salido, Emily J. Markowitz, and Edward Nelson in this Federal Reserve paper study Fed’s perspective on price stability since 1950s:

By examining statements made by the Federal Reserve leadership since the early 1950s, we establish that there has been considerable continuity in policymakers’ perceptions of the benefits of price stability. Policymakers have consistently contended that deviations from price stability give rise to greater cyclical instability, and they have also frequently suggested that potential output is significantly lowered by inflation. The recurrent support for price stability that comes through in these statements implies that it is invalid to take periods in the U.S. record of deviations from price stability as indicating a policymaker belief in the desirability of inflation.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

India’s Deposit Insurance @60: Retrospect and Prospect

June 20, 2024

Ashutosh Raravikar, Avijit Joarder and Anup Kumar of RBI in the recent RBI bulletin reflect on 60 years of Deposit Insurance in India:

Deposit insurance is crucial for financial stability and protection of depositors. India’s deposit insurance system has reached a milestone with completion of sixty years of its existence. This article provides an overview of global developments in the field, narrates the evolution of the Indian deposit insurance system, spells out its achievements and suggests an agenda in fulfilment of further goals during its onward journey.

Key findings:

  • The spread and coverage of deposit insurance has gradually expanded across the world especially since the global financial crisis.
  • Established with the objectives of financial stability and protection of small depositors, India’s deposit insurance system has reached a milestone with completion of sixty years of its existence. Its major achievements include enhanced coverage limit, speedy settlement of claims, revisions in premium, robust deposit insurance fund, prudent treasury management and initiatives for depositor awareness.
  • Empirical estimates indicate that the Reserve Ratio1 is expected to increase steadily in the near future.
  • The future agenda may comprise of:
    • Attaining complete alignment with the Core Principles released by International Association of Deposit Insurers (IADI).
    • Speedier claim settlement through practices such as direct payments to depositors.
    • Proactive treasury management through apt mix of instruments and reduction in interest rate sensitivity.
    • Modernisation of physical and digital infrastructure for security and efficiency.
    • Capacity building with human resources development.
    • Devising deposit insurance coverage in tune with the emerging innovations in Fintech.
    • Developing the arrangements for back up funding during contingencies.
    • Periodic review of deposit insurance coverage.
    • Raising public awareness on deposit insurance through financial education and addressing gaps through suitable communication strategies.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance, Indian Economy/Financial Markets | Leave a Comment »

Reinforcement Learning from Experience Feedback: Application to Economic Policy

June 19, 2024

Tohid Atashbar of IMF in this paper tells you the kind of historical analysis one needs to do in today’s times.

Learning from the past is critical for shaping the future, especially when it comes to economic policymaking. Building upon the current methods in the application of Reinforcement Learning (RL) to the large language models (LLMs), this paper introduces Reinforcement Learning from Experience Feedback (RLXF), a procedure that tunes LLMs based on lessons from past experiences. RLXF integrates historical experiences into LLM training in two key ways – by training reward models on historical data, and by using that knowledge to fine-tune the LLMs.

As a case study, we applied RLXF to tune an LLM using the IMF’s MONA database to generate historically-grounded policy suggestions. The results demonstrate RLXF’s potential to equip generative AI with a nuanced perspective informed by previous experiences. Overall, it seems RLXF could enable more informed applications of LLMs for economic policy, but this approach is not without the potential risks and limitations of relying heavily on historical data, as it may perpetuate biases and outdated assumptions.

Phew!

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

Should economists, like medical doctors, take an oath of ethics?

June 19, 2024

The Philosophical Theorist in the IMF Finance and Development Magazine has prepared an oath of ethics for economists:

We entrust economists with the health of the world economy. Should they, like medical doctors, take an oath of ethics?

I am but one drop amid many in the vast ocean of social, political, and economic realities. Yet, bearing the essence of the entire ocean, I will carry out my duties with detachment, free from emotional ties to outcomes or to the allure of recognition.

As I dedicate myself to understanding our world and enhancing individual freedoms, informed by past wisdom and the universal principles that bridge human experiences, I pledge to set aside my fleeting urges and elevate my feelings, thoughts, and actions toward wisdom, liberty, and service.

People behind the numbers

I will always remember that behind the numbers and codes there are people with dreams, aspirations, and needs.

Tradition and freedom

In crafting policies, I will respect local traditions, yet be informed by universal human freedoms, while ensuring that my values guide but do not dominate.

Humble listening, thoughtful speaking

With imagination and curiosity, I will aim to uncover unseen layers of people, places, and ideas, valuing understanding over quick judgments.

Diversity in understanding

I will honor truths from diverse voices, regardless of background, eloquence, or identity.

Mindful of motives, yet objective

I will be honest about my personal leanings, politics, and ambitions while making a sincere effort to anchor my work and advice in objectivity.

Truth through data

I commit to using data to uncover and measure the deeper truths of our economic lives, even before I look for cause and effect.

Grit and grace in learning

I promise to continuously hone my expertise, learn from missteps, and stay open to fresh insights, even those that question my core beliefs.

Progress with perspective

Beyond the promotion of individual and national incomes, I vow to enhance progress rooted in human well-being and inclusive prosperity.

Clarity amid complexity

I will communicate my insights clearly and without pretension so that complex ideas are both accessible and respected for their intricacy.

Shared stewardship

Engaged with civil society, I will spur broader participation in economic dialogue, emphasizing our shared stake in the economic future.

Principled pragmatism

Real-world constraints may push me toward quick wins or voter-safe solutions, but I will strive for policies rooted in sound principles and social welfare.

Mentorship for tomorrow

By guiding and inspiring future economists, I will ensure that the torch of wisdom and curiosity shines brighter across eras.

Future focus

I will endeavor to shape an economy that benefits the planet and future generations, placing suitable value on the distant rewards of sustainable growth.

Seeing the unseen

Aware of potential distortions from varying interests, I will remember the unrepresented, weighing visible benefits against unseen costs for silent stakeholders.

Principled path

Even in the absence of external rules or laws, my ethical stance will remain steady—advance progress or avoid harm and never forget my work’s societal implications.

With this pledge, I hold in my heart a commitment to apply my knowledge and efforts for the greater good, ever conscious of my duty to people, planet, and progress.

 

Posted in Academic research & research papers, Economics - macro, micro etc, Economist, Financial Markets/ Finance | Leave a Comment »

« Older Entries
Design a site like this with WordPress.com
Get started